General Motors or Citibank

And with the whole world to choose from, sector proponents
contend that American investors should not be deciding if they
want General Motors or Citibank in their portfolios. A more logical
choice is between General Motors and Toyota, the kind of
choice that will keep investors focused on finding the best company,
whether it is based at home or abroad.6

Take the example of ownership of indexes in the United States

Take the example of ownership of indexes in the United States,
Germany, and Japan as a way to diversify a portfolio. While the
foreign portion of this portfolio may be diversified by country, sector
proponents argue that it is not well diversified by sector. They
point out that in the American portion of the portfolio the automotive
sector accounts for just 0.5 percent, while in Germany autos
are 11.4 percent of the weighting of the stock market, and that
rises to 12.2 percent in Japan, according to MSCI indexes at the
end of 2006. A more extreme example is Finland, where the local
stock market is dominated by the technology sector in the name of
Nokia, which makes up 45.6 percent of the Finnish MSCI index;
so investors have really bought a sector rather than a country.

The correlation between stocks and commodities

The correlation between stocks and commodities, using the
24 commodities in the GSCI Total Return index, is also pretty
negative. The correlation has averaged minus 0.027 since 1986.
The high correlation was 0.303 in December 1996, while the low

Bonds and commodities

Now we want to show you how simple bad-and that is a good thing, from a diversification
Point of view-the correlation between equities and
Bonds and equities and commodities. Bonds and commodities have
Spirit of its own, as you can see from a quick glance at Figure 2.2.

Ten Principles of Economics

In this chapter we take up the topic of welfare economics, the study of how
the allocation of resources affects economic well-being. We begin by examining the
benefits that buyers and sellers receive from taking part in a market. We then examine
how society can make these benefits as large as possible. This analysis leads
to a profound conclusion: The equilibrium of supply and demand in a market
maximizes the total benefits received by buyers and sellers.
As you may recall from Chapter 1, one of the Ten Principles of Economics is that
markets are usually a good way to organize economic activity. The study of welfare
economics explains this principle more fully. It also answers our question
about the right price of turkey: The price that balances the supply and demand for
turkey is, in a particular sense, the best one because it maximizes the total welfare
of turkey consumers and turkey producers.

OPEC respond

OPEC respond to high prices by increasing oil exploration
and by building new extraction capacity. Consumers respond with greater conservation,
for instance by replacing old inefficient cars with newer efficient ones.
Thus, as panel (b) of Figure 5-9 shows, the long-run supply and demand curves are
more elastic. In the long run, the shift in the supply curve from S1 to S2 causes a
much smaller increase in the price.

world’s stock markets

The rest of the world’s stock markets, and other asset classes
like bonds and commodities, provided what investors needed to
diversify—foreign markets and other investments than stocks
that would move in the opposite direction of equities in the
United States.

quantity of labor demanded

In addition to altering the quantity of labor demanded, the minimum wage
also alters the quantity supplied. Because the minimum wage raises the wage
that teenagers can earn, it increases the number of teenagers who choose to look
for jobs. Studies have found that a higher minimum wage influences which
teenagers are employed. When the minimum wage rises, some teenagers who
are still attending school choose to drop out and take jobs. These new dropouts
displace other teenagers who had already dropped out of school and who now
become unemployed.

In dollars, this downshift in returns since

In dollars, this downshift in returns since the 1990s means
that a portfolio invested all in stocks would have a 8.5 percent
nominal return, which is Siegel’s 6 percent prediction for the afterinflation
return, with 2.5 percentage points of inflation added
on. It would take eight and a half years for the portfolio to double
in size. At 6.5 percent, including inflation, a much more pessimistic
assumption

Willingness to take on added risk

This willingness to take on added risk is one of the reasons
that longer-term interest rates remained unexpectedly low in
2004, 2005, and 2006, even as the Federal Reserve raised its
short-term interest rate target, the federal funds rate on
overnight loans. After the central bank had increased its target
by 4.25 percentage points, from 1 percent to 5.25 percent, the
yield on the Treasury’s 10-year note at the end of 2006 was virtually
at the 4.70 percent level of June 2004, when the Federal
Reserve began that round of interest rate increases. The yield
on the 10-year note did not get above 5 percent until April of
2006, the first time in four years, but stayed there for only four
months.